Carpe Diem

Talk About Cutthroat Competition and Price Wars!!

DETROIT, MI The two gas stations stand across an intersection from each other in Detroit, where even a penny’s difference was enough to lure customers. And so came the price war: One station dropped a cent or two, and the other grudgingly followed.

But the seemingly petty back-and-forth escalated Friday, ending with a fatal bullet in BP station owner Jawad Bazzi’s head over what police say was a 3-cent difference in the cost of regular gas.

The Marathon station dropped its price to $2.93. That angered Jawad Bazzi, whose regular gas was priced at $2.96. Bazzi walked across the street with a couple of employees to confront the Marathon owner and his posse. The groups argued, then began throwing punches. One of Bazzi’s employees hit a Marathon employee with a baseball bat, injuring him. That’s when the Marathon owner grabbed a handgun and fired three or four times. Bazzi, 45, was shot in the head.

And here’s the amazing conclusion to the story:

After the shooting, with the competing station closed, BP’s price per gallon increased to $3.09 for regular.
(HT: Holeydonut)
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Goldilocks Rocks in Alabama; Record Low Un Rate

Birmingham, AL — Alabama’s jobless rate fell to an historical record low of 3.1% in October, state labor figures released Friday show (see graph above). October’s rate of 3.1% was almost 3.5% below the average unemployment rate of 6.55% from 1976-2007, and provides further evidence that the U.S. economy is not on the verge of going into a recession.

A full report on October state unemployment rates is due from the BLS on Tuesday.
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Rising Inequality: Natural Outcome of Competition

The top graph above (click to enlarge) shows the rising income share of the top-earning 25% of U.S. taxpayers from 1986-2005 according to IRS data. In 1986, the top 25% earned 59.04% of total income, and by 2005 the income share of the top 25% increased to 67.5%, indicating rising income inequality over time.

Interestingly, the same pattern of rising income inequality over time also can be found in professional baseball. Using a sample of 5 MLB teams from the USA Today Salaries Database for professional sports (NBA, NFL, MLB and NHL), the bottom chart above shows an increasing share of total payroll going to the top 25% highest-earning players on each team from 1988 to 2007.

Consider that in 1988, for the 5 teams listed above, an average of 59% of total payroll went to pay the highest-earning 25% of the team roster (slighly lower than the 62.4% share for the general population), and by 2007 that payroll increased to 70% on average for these teams (slightly higher than the 67.5% for the general population).

What are we to make of this pattern of rising income inequality in both MLB and the general population?

Here’s what US Court of Appeals Judge Richard Posner wrote on his blog last year:

As society becomes more competitive and more meritocratic, income inequality is likely to rise simply as a consequence of the underlying inequality–which is very great–between people that is due to differences in IQ, energy, health, social skills, character, ambition, physical attractiveness, talent, and luck. Public policies designed to reduce income inequality, such as highly progressive income taxation and middle-class subsidies, are likely to reduce the aggregate wealth of society, and therefore should not be adopted unless rising income inequality is a social problem.

Here’s another way to think about it: If your talents, abilities, and intelligence place you 2-3 standard deviations above the mean, would you rather be selling your labor services in 1807, 1907, 1957, or 2007? Probably 2007. Given Babe Ruth’s talent, he would have obviously been much better off playing today instead of the 1920s. The super-talented baseball players of today are facing higher rewards than their peers of 20 years ago, and they are able to command greater shares of team payrolls.

And as talented as Tiger Woods, Oprah, and Bill Gates are, I don’t think they would trade today’s opportunities for marketing their “superstar” talents with the opportunities of the 1950s. And if your engineering talents place you 3 standard deviations above average and you’re living in India or China, I don’t think there’s any question that you’re much better off today than in the 1980s.

Bottom Line: Competition breeds competence, and above-average competence commands higher monetary rewards in an increasingly competitive, increasingly globalized world economy. Rising income inequality over time is a natural outcome of competition and globalization.

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Significant Income Inequality in the NFL, Too

According to data from the IRS (presented here by the Tax Foundation), the top 25% of U.S. taxpayers earned 67.5% of total income in 2005 (most recent year available), and that group paid 86% of all income taxes paid.

In the media coverage and in the political commentary on rising income inequality and the “disappearing middle class,” much more attention is paid to the disproportionate income share of the richest quarter of Americans (67.5%) than the disproportionate share of taxes paid by that group (86%).

But how does income inequality in the National Football, where the aveage salary is about $1,000,000, compare to the income inequality in the general population? Using this USA Today 2006 salary database for the NFL, NBA, MLB and NHL, the chart above shows the significant income inequality for a selected group of NFL teams (the 4 teams with the highest overall payrolls).

Interestingly, the pattern of income distribution in the NFL is strikingly similar to the income inequality of the general population, and is actually slightly greater in the NFL (at least for these 4 teams). For example, the incomes of the top 25% of the players on the 4 teams above are paid between 71% and 77% of the total payroll.

As I mentioned in one my very first CD posts, perhaps this pattern of income distribution is a natural and expected outcome of any extremeley competitive environment where talent is scare, valuable and highly paid, whether it’s the NFL or the overall economy.

Consider that Baltimore Ravens’ Steve McNair’s 2006 salary of $12 million was 106 times the salary of the lowest paid Raven, Ikechuku Ndukwe, who made only $113,325. Isn’t that comparison about as meaningless as the comparison between a CEO’s salary and the salary of the lowest paid member of the organization?

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Higher Turkey Prices, Thanks To Ethanol

From this news article “Thanksgiving May Cost You”:

If you’re planning a major feast this Thanksgiving, it might be a good idea to budget a few extra dollars to make sure you can get the guest of honor to the table. The rising cost of oil and other utilities, combined with an explosion in the cost of corn feed, has increased the cost of raising a turkey by as much 35% and costing the industry more than a half-billion dollars.

Nationally, increases in feed costs are expected to cost farmers more than $576 million, said Sherrie Rosenblatt, a spokeswoman for the Washington, D.C.-based National Turkey Federation.

As an increasing number of farms devote their corn crops to the production of ethanol rather than animal feed, feed costs have exploded, from less than $1 per bushel last year to more than $4 today.

“Turkey feed is about one-third of the cost of raising a turkey,” she said. “We feed turkeys a combination of corn and soybean.”

With many growers switching to the more profitable corn for ethanol, turkey farmers are trying to cope with a one-two punch of increasing corn prices and decreased soybean production.

According to some estimates, the higher prices translate to about an 8 cent increase per pound, per turkey, or about a 35 percent increase in the cost of raising just one bird.

Solution: To protect against rising food prices, you could have bought some shares of ADM (a major ethanol producer) a few years ago. As the chart below shows, ADM stock (blue line) has risen almost 60% over the the last two years, about 3X higher than the 20% increase in the S&P500 (red line).

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Churnin’ and Turnin’: High Turnover in Forbes 400

In a study by Federal Reserve economist Arthur Kennickell titled “A Rolling Tide: Changes in the Distribution of Wealth in the U.S., 1989-2001,” he looks at the considerable amount of churning that take place in the composition of the annual Forbes 400 list of the richest Americans.

Of the 400 people in the 2001 Forbes list of the wealthiest Americans, 230 were not in the 1989 list and this group achieved enough wealth during the 1990s to replace almost 60% of the 400 richest Americans in 1989. As the study says, “Over this long a period, such movement may be somewhat less surprising, but even between 1998 and 2001 nearly a quarter of the people on the list were replaced by others.”

Bottom Line: The way “the rich” are often portrayed by the media and the general public, you would think a group like the Forbes 400 was a private club, closed to new members, and with no turnover. The reality is that there is much more churning and turnover than one might think in the group of the 400 richest Americans. Even in a short 3-year period, there was almost a 25% turnover rate, and over a longer 12-year period there is almost a 60% turnover in the Forbes 400. And the group of the wealthiest 400 Americans is probably fairly representative of other groups of less-wealthy individuas – there is lots of churning and turnover at all levels of the income spectrum as people move up and down the income quintiles over their careers and lifetimes.

Keep in mind that Oprah, Tiger Woods and Bill Gates were probably in the lowest income quintile at one time before moving up to the top end of the richest quintile, and might end up in a lower quintile at some point in retirement by income (although certainly not by wealth).

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Gov’t: Uniquely Unqualified to Solve Problems

As coercive monopolies that spend other people’s money taken by force, governments are uniquely unqualified to solve problems. They are riddled by ignorance, perverse incentives, incompetence and self-serving. The synthetic-fuels program during the Carter years consumed billions of dollars and was finally disbanded as a failure. The push for ethanol today is more driven by special interests than good sense — it’s boosting food prices while producing a fuel of dubious environmental quality.

~John Stossel in his column today “Don’t Look to Government to Cool Down the Planet”

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1.Repeal Humphrey-Hawkins, 2.Establish Price Rule

From today’s WSJ editorial, a 2-step plan to improve monetary policy and avoid monetary-induced cycles of booms and busts in the housing and financial sectors.

Step 1. Repeal the Full Employment and Balanced Growth Act of 1978.

Also known as Humphrey-Hawkins, this is the law that mandates that the Fed consider both price stability and full employment in making monetary policy decisions. Mr. Bernanke noted yesterday that this dual mandate makes it impossible for the Fed to target only inflation the way, say, the European Central Bank is mandated to do. It is in pursuit of this dual mandate that the Fed sometimes takes its eye off the prize of price stability, most recently with Alan Greenspan’s decision to hold interest rates too low for too long this decade. We are now living with the housing and financial boom and bust consequences.

Step 2. Establish a genuine price rule, i.e. an inflation target, like Canada, New Zealand, Australia, Sweden, and U.K.

Amen.

Carpe Diem

Michigan’s Troubled Economy: It Could Be Worse

DETROIT — Bad news on the automotive front pushed Michigan’s October unemployment rate up to 7.7%.

The jobless rate is the state’s highest in 15 years (see chart above, click to enlarge), two-tenths of a percentage point higher than September’s rate, and it almost certainly guarantees that Michigan will continue to post the worst state unemployment rate in the nation.


But hey, it could be worse. It could the late 1970s, when Michigan’s jobless rate averaged 8.15% from 1976-1979. It could be the 1980s, when the average was almost 11% (10.81%), and a whopping 13.22% during the first half of the decade. And as bad as a 7.7% unemployment rate sounds today, it’s actually slightly below Michgian’s average monthly unemployment rate of 7.9% from 1976-2007 (see chart above).

Consider also that Michigan has a $405 billion economy (2006) that would be the 17th largest economy in the world if it were a separate country, ahead of Belgium ($393b), Turkey ($392b), Sweden ($385b), Switzerland ($377b), Taiwan ($355b), and Saudi Arabia ($348b).

So as bad as economic conditions might appear in Michigan, it survived the 1970s and 1980s, and it has a $400 billion economy that will survive the relatively high unemployment rates today.